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Preparing to go public
framework and capital structure and put
in place a strong board and governance
structure, including antitakeover defenses,
for a number of reasons:
• Changes after the IPO will be very
visible, likely requiring disclosure,
governance document posting and
potential filings.
• Post-IPO changes may require
stockholder approval, which may be
difficult to obtain.
• Some governance requirements, such
as identifying independent directors,
should be initiated early in the process,
as they may take considerable time.
It is important that the company work
closely with the underwriters to develop
a properly balanced board and governance
structure, as certain elements may affect
investor interest and, ultimately, pricing. The
company should also anticipate the makeup
of its stockholder base. What percentage of
stockholders are likely to be institutional
investors compared to retail investors?
Are there likely to be any hedge funds or
stockholder activists? Going forward, these
characteristics of the stockholder base will be
an important element of investor relations.
Governance matters have become a central
focus of activist stockholders, as well as
investment advisory firms such as ISS and
Glass Lewis, which evaluate a company’s
governance structure in making stockholder
voting recommendations.
This chapter describes the governance
structure for a U.S. domestic company and,
in particular, a Delaware corporation. For a
discussion of governance issues relevant to
foreign private issuers, see Section 9.7.
Board of directors and board committees:
A public company’s board composition
and structure are often very different
from those of a private company. A
U.S. public company must comply with
governance requirements imposed by
stock exchange listing requirements and
SEC rules, as well as related disclosure
requirements. For more information about
these stock exchange listing requirements,
see Section 6.2.
In particular, the stock exchanges,
including the NYSE, require that the
board of directors have a majority of
independent directors within one year
of listing. In addition, post-IPO, the
company must have an audit committee
meeting SEC and stock exchange rules on
composition, independence and financial
expertise and under stock exchange
rules must also have compensation and
nominating committees made up of
independent directors. As required under
the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the Dodd-
Frank Act), the stock exchange rules now
also contain additional independence
requirements for compensation
committee members. Some of these
governance requirements can be phased
in following the IPO, but the company
generally must be fully compliant within
one year. “Controlled companies,” or
companies with a majority stockholder,
are exempt from most of these
requirements except the audit committee
rules. Other SEC and U.S. tax rules also
typically influence the composition of the
compensation committee, as discussed
in Section 2.4, as well as “interlocking”
relationships with other companies.
Beyond the required structures, the
company should carefully consider the
right mix of board member qualifications;
and a larger board, with more than seven
or eight members, might warrant the
formation of other standing committees,
such as a finance committee or a risk
committee.
Antitakeover defenses: Antitakeover
defenses are a key element of pre-IPO
governance planning. Achieving the
right balance is important, as too strong
a defense profile may be disfavored by
investors, which often benefit from stock
price premiums in a takeover context;
many of these protections may attract
negative stockholder attention and
proposals for change down the road. The
defenses an IPO company may consider
include the following:
• Poison pill (or “rights plan”)—
Increasingly a focus of pressure
from activist stockholders, the
poison pill remains the most potent
structural takeover defense. Under
a typical poison pill or rights plan,
the company issues rights to the
existing stockholders. These rights
allow holders (other than a bidder) to
purchase stock in the target or in the
acquiring company at a steep discount
(usually half price) if a hostile bidder
acquires a certain percentage (usually
15% or 20%) of the outstanding
shares. This dilutes the voting
power of the bidder and makes it
more expensive to acquire control
of the target. Although their terms
and conditions vary considerably,
the purpose of a poison pill is to
force potential bidders to negotiate
with the target’s board of directors.
The rights usually have redemption
provisions that permit the company
to redeem the rights at a nominal
price. If the acquisition is friendly and
the board approves the deal, it may
use this feature to redeem the pill or
otherwise exempt the transaction.
• Controlling changes to the board of
directors—Various charter or bylaw
provisions related to changes in
directors can make it more difficult
for hostile bidders or dissidents
to influence and control a board
of directors, although these are
also under pressure from activist
stockholders. For example, with a
typical classified or staggered board
having three classes of directors,
each elected for a three-year term,
only one-third of the directors
are up for renewal at each annual
meeting. The company may wish to
avoid other provisions that make it
easier for an insurgent group to force
changes in directors and thus gain
control, such as cumulative voting,
which can result in the election of
a director with the support of only
a small percentage of stockholders,
and provisions allowing stockholders
to remove directors without cause,
increase the number of directors
without limit and fill board
vacancies. The company should
also consider whether to adopt a
plurality or majority voting standard
for director elections. While
plurality voting generally increases
the likelihood that management’s
director nominees will be elected,
majority voting provides for a
more democratic process and has
gained in popularity over the past
several years, with a strong focus by
activist stockholders and investment
advisory firms.
NYSE IPO Guide
25